Where you can clear $100,000-a-year on a rental property

The housing market’s recovery is choppy, but those fortunate enough to have an investment property can reap rewards — depending on what city they live in, that is.

Oklahoma City is the most profitable market for month-by-month gain on rent alone, according to a survey of the 50 largest metro areas in the U.S. by real-estate website Zillow. The difference between the monthly rent and mortgage payments for the average single-family home is $536 a month or $6,431 over the year. Miami-Fort Lauderdale, Fla. ($515 a month), Tulsa, Okla. ($396 a month) and Cincinnati ($385 a month) rank just behind it.

But the big money for landlords lies in property in fast-appreciating real-estate markets with high property values. The city rated as the most profitable market for landlords over a six-year period is SanJose, Calif. ($8,927 a month profit and $107,122 per year). San Francisco is No. 2 ($6,078 a month and $72,939 per year.)

Short-term profit as calculated by Zillow is simply the difference between rent and mortgage payment on the median home, accounting for property and income taxes, and maintenance. However, long-term profit includes all of that plus home equity gains and tax benefits. Most notably, the lion’s share is derived from unrealized equity built up over those next six years after the property is first rented out.

Of course, most mom-and-pop landlords are simply trying to cover the mortgage. “When deciding if they should sell their home or rent it out, most mom-and-pop landlords are primarily concerned with whether or not they can cover their mortgage payment each month — they simply can’t absorb monthly losses like professional investors,” Zillow’s chief economist, Stan Humphries, said in a statement.

Rents increased by 2.5% in June 2014 versus the same month a year earlier and 9.1% since June 2011, according to the national Zillow Rent Index. In some local markets, however, rents have surged as much as two to three times that amount over the past year. Rents rose by 13.5% in San Jose in June year-over-year, increased 11% in San Francisco and 7.9% in Denver, Col. and 7.6% in Austin, Texas.

“We have depressed and delayed home ownership attainment among younger adults,” says Stuart Gabriel, director of UCLA’s Richard S. Ziman Center for Real Estate. These households have more challenges in the job market and high student loan burdens, he says. “Home ownership is a leap of faith. If you don’t believe there’ll be significant appreciation, there’s no reason to buy,” Gabriel adds.

The rental population is rising, but the number of homeowners is not, says Lawrence Yun, chief economist with the National Association of Realtors. “It’s a landlord’s market,” he says. “Any changes in lending standards are modest and not having any meaningful impact yet,” Yun adds. What’s more, builders are starting to add new supply, but not in a way that’s having an impact, he says, so the apartment vacancy rate is rising.

Experts say the housing market recovery is mixed. New single-family home sales fell 4.9% during the first month of the year compared with last year, the Commerce Department said last month. Sales of existing homes did slightly better, however, rising 2.6% on a seasonally adjusted basis to 5.04 million in June, according to data released last month by National Association of Realtors, the industry group.

Renting is less affordable, according to a 2013 report by the Harvard Joint Center for Housing Studies. Some 50% of renters spent over 30% of their gross income on rent — the traditional measure of affordability — in 2010, up a record 12 percentage points from the 38% of households facing such a burden a decade prior. And more than one-quarter of those renters spent 50% of their salary on rent.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.